Effects of Inflation

• the purchasing power of the dollar
• the value of real wages
• interest rates
• saving and investing
• production costs

• The decreasing value of the dollar particularly hurts people on fixed incomes
• As the value of the dollar falls, the purchasing power of people who rely on set pension checks or other fixed income decreases as well
• To combat this problem, many labor contracts, government benefits, and retirement plans include cost-of-living adjustments (COLAs). COLAs automatically raise wages or payments to account for inflation.

• Inflation reduces the value of workers' real wages when pay increases fail to keep pace with rising prices
• However, wages tend to stay ahead of or at the pace of inflation

• As prices increase, interest rates (the price of borrowing money) tend to increase as well
• High interest rates can decrease consumer spending - particularly on goods that are usually purchased on credit or through loans (i.e. computers, cars, houses)
• High interest rates can double or even triple consumers' monthly credit card or loan payments

• Inflation affects the return that people receive from their savings and investments
• If inflation is running at a higher rate than the interest you earn on your savings, you lose money overall

• Businesses that issue long-term bonds with interest rates lower than the inflation rate benefit from inflation
• However, high inflation hurts most businesses because inflation increases their costs of production

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